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Optimal fiscal policies in an economy with externalities from public spending

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  • Chia-Hui Lu

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Abstract

This paper examines the optimal fiscal policies in an economy with externalities from government expenditure. We extend Lucas (Oxf Econ Pap 42:293–316, 1990 ) two-sector endogenous growth model and consider the spillover effects from the public spending on infrastructure and education. We compare the optimal fiscal policies derived from the Ramsey allocation problem with those in the centrally-planned economy. The results of this paper are as follows. First, the optimal share of public spending on infrastructure is smaller than its relative contribution in the production function. Next, the optimal share of public spending on education is smaller than its relative contribution in the accumulation of human capital, and does not affect the tax rate of capital income. Finally, the optimal tax rate of capital income is positive if the externality from public productive spending exists. Copyright Springer-Verlag Wien 2015

Suggested Citation

  • Chia-Hui Lu, 2015. "Optimal fiscal policies in an economy with externalities from public spending," Journal of Economics, Springer, vol. 116(3), pages 211-228, November.
  • Handle: RePEc:kap:jeczfn:v:116:y:2015:i:3:p:211-228 DOI: 10.1007/s00712-015-0433-9
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    References listed on IDEAS

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    1. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
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    6. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
    7. Antonio Ladrón-de-Guevara & Salvador Ortigueira & Manuel S. Santos, 1999. "A Two-Sector Model of Endogenous Growth with Leisure," Review of Economic Studies, Oxford University Press, pages 609-631.
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    More about this item

    Keywords

    Fiscal policy; Optimal taxation; Externality; Two-sector growth model; E62; H21; H23; O41;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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